Aug. 28 (Bloomberg) -- Holders of Soviet bonds first sold
in Communist leader Leonid Brezhnev’s final year are getting in
France what they can’t get from President Vladimir Putin: money.

The European Court of Human Rights in Strasbourg ordered
Russia last month to pay Yuriy Lobanov, a septuagenarian from
the Ivanovo region near Moscow, 37,150 euros ($46,497) in
compensation for the 1982 notes he held, or about 140 times the
average monthly pension. Mariya Andreyeva, a 95-year-old
survivor of the Nazi blockade of Leningrad, won a preliminary
4,300 euros on the bonds, which doubled as lottery tickets.

The securities are part of the 25 trillion rubles ($785
billion), equal to almost half of Russian economic output, the
government says it still owes the public from lost Soviet
savings. Putin is stalling, most recently signing an order in
April to halt payments on the notes until at least 2015. Now,
armed with court rulings, veteran speculators are joining
pensioners in seeking to cash in.

“This all should have been settled back in the 1990s,”
said Boris Kheyfets, a Soviet debt specialist at the Russian
Academy of Sciences’ Institute of Economics in Moscow. “How do
you assume a debt that huge? It would collapse everything
immediately.”

Chic Sedan

Soviet authorities began selling the 20-year certificates
in 1982 for 25, 50 or 100 rubles, partly to redeem earlier bonds
and partly to sop up cash from a command economy with few
consumer goods. The State Domestic Lottery Bonds offered a token
3 percent interest and a chance at payouts of as much as 10,000
rubles, Kheyfets said. The top winners were entitled to a
“chic” Volga sedan, while second prize was a Zhiguli.

Unlike other former Soviet republics that settled similar
debts in the 1990s at a fraction of what was lost, Russia
pledged to cover the whole amount. President Boris Yeltsin
signed a law in 1995 ordering the government to restore savings
via bank deposits and Soviet bonds based on what those holdings
could have purchased in 1990. Payments started in earnest during
Putin’s first term, when surging oil prices pushed the budget
into surplus. Now Putin is back in the Kremlin for a third term
and the budget is barely breaking even.

“Clearly, implementing this plan to restore the public’s
savings would impose exorbitant obligations on the federal
budget,” the Finance Ministry said in its most recent debt
strategy report, released a year ago. “Were that actually to
happen, the state would be deprived of the ability to pay for
other expenses for an extended period of time.”

‘Nothing Left’

In the 1990s, Russia was passing laws without thinking of
how they’d be funded, Putin told a meeting of regional human
rights officials Aug. 16. Repaying all lost savings immediately
would mean “nothing left to pay salaries to soldiers, to
doctors, to teachers,” Putin said, according to a transcript on
the Kremlin’s website. Russia should continue to pay what it can
to the most elderly people who lost savings, he said.

The Finance Ministry’s plan to compensate the most elderly
“victims” is the best approach, and gradual payments should be
continued, Putin said. “This is something we’ve inherited from
the past, but we need to do something about it.”

The government has earmarked 50 billion rubles in this
year’s budget to repay lost deposits, and the same amount for
2013 and 2014. Savers who die are also eligible for 6,000
rubles, less than $200, in funeral costs.

“We make the payments every year, but it’s a miserly
amount,” Kheyfets said. “I guess that’s just how it’s going to
be until the people die.”

Tsarist Debt

Running out the clock may now be a losing tactic. In their
Lobanov ruling, the Strasbourg judges cited Russia’s refusal to
say how many of the 1982 bonds are outstanding and its repeated
suspension of a mechanism for redeeming them, “for reasons that
remain unclear to the court.”

The Justice Ministry, which represents Russia in
Strasbourg, said in a faxed statement that it honors all
judgments by the European Court of Human rights, adding that the
Lobanov ruling only applies to the 1982 notes. The Finance
Ministry declined to comment.

The estimated 25 trillion rubles in liabilities, if fully
recognized, would boost Russia’s debt nearly 10-fold, Vladimir
Osakovskiy, chief economist at Bank of America Merrill Lynch in
Moscow, said today in an e-mailed comment. Earlier settlements
suggest Russia will find a way to avoid damage to its credit
ratings or sovereign debt, he said.

“Back in 1997, Russia settled outstanding tsarist bonds in
France for $400 million, which was less than 1 percent of
foregone purchasing power in nearly 100 years of foregone
interest,” he said. “We expect similar settlement in this case
as well.”

Shadow Economy

There are no public records for how many Brezhnev bonds
were sold, Kheyfets said. As bearer bonds with no ownership
records, the 1982 notes served as a second currency supporting
the Soviet shadow economy, he said.

Russia didn’t mention the notes or estimate of Soviet
savings debt in the 143-page prospectus for its $7 billion sale
of Eurobonds this year.

Some of the securities were cashed in or swapped for new
debt in the early 1990s. After the 1995 law, when Russia agreed
to restore lost savings at 1990 levels, the state converted the
1982 bonds into so-called promissory rubles, essentially
increasing their face value by 40 percent. Later legislation
pegged their value to a basket of consumer goods and ensured
they would accrue interest of at least 9 percent. The government
last valued the promissory ruble in 2003, at 32.34 current
rubles, a figure cited by the court in the Lobanov case. The
ruble fell 0.5 percent to 32.02 per dollar by the close in
Moscow.

Trunk Load

Lobanov offered a “very sound” valuation, leaving little
room for rebuttal, said Vasily Vasilyev, a lawyer at Yukov,
Khrenov & Partners in Moscow. Russia dodged similar rulings by
changing the law during European court proceedings, he said.

Speculation on the certificates has made it as far as
EBay.com, where 25-ruble 1982 bonds are being offered for $2.85
apiece.

On Russian websites, some sellers claim to have proof their
bonds are listed as subject to payment in a Finance Ministry
registry. Others are offering notes sold in former Soviet
republics, which Russia isn’t legally obligated to repay.

Zakir Agabayev said he discovered 600,000 rubles of the
notes in a trunk at his wife’s grandmother’s home in Kyrgyzstan.
He said he offered to sell the bonds on the Dorus.ru message
board, but the best offer was 2.5 percent of face value, so he
declined.

Soviet Tycoon

“People called two or three times, but the offers weren’t
serious,” Agabayev said by phone.

The biggest bet so far was made by Artem Tarasov, a
commodities and computer trader who shot to fame in 1989 after
claiming on national television to be the first legal Soviet
millionaire. He became part owner of Moscow-based Vitas Bank,
which lost its license this year after trying to put 3 billion
rubles of the Brezhnev bonds on its books at face value.

Putin signed the three-year payment freeze after the
central bank first noticed Vitas’s accounting move, Tarasov said
in an interview in his Moscow office. After the moratorium, the
regulator classified the notes as Category 5, or hopeless, and
told the bank to form 100 percent provisions for loan losses.

“How could we have ever imagined the central bank would
come and declare their country in default?” Tarasov said. “But
that’s just what they did.”

‘Cinderella Story’

Central bank First Deputy Chairman Alexei Simanovsky said
Vitas’s license was revoked because its capital adequacy ratio
fell below the mandatory 2 percent level, not because of the
notes. Regulators only saw a fraction of the 3 billion rubles
Vitas claimed to have, Simanovsky said by phone.

“The bank maintained that this was two tons of paper, that
they were in some special depositary and that getting in was
somehow very hard,” Simanovsky said. “It’s all a bit like the
story of Cinderella, where the pumpkin turns into a carriage.”

Still, Tarasov has access to 50 billion rubles of the
certificates that he plans to “tender for all they’re worth,”
he said.

“Suppose they really do start making payments on these
bonds in 2015,” Tarasov said. “Their value today in Russian
money is 50 to 60 times the nominal value.”

‘Toilet Paper’

Russia probably will only resume payments if a group with
enough political clout starts amassing them, said Saleh Daher,
managing director at Turan Corp., which has invested in Soviet
commercial debt.

“People will make money from this,” Daher said by phone
from Boston, where Turan is based. “And I doubt very much that
much of it will go to the pensioners or the people who actually
had the claims in the beginning.”

One of those people is Boris Andreyev, a 65-year-old
retired electrician with no legal training.

For almost two decades, Andreyev and his mother, Mariya
Andreyeva, have sent hand-written petitions to courts and
ministries seeking repayment. The 4,300 euros the judges in
Strasbourg awarded, based primarily on his mother’s advanced
age, is a pittance, he said.

Their notes, deposited in 1986, were bought up in a state
program in 1993 that left them with about 3,000 rubles in a bank
account, an amount that shrank to 3 rubles after the currency’s
redenomination in 1998. The account, still open and untouched,
has grown to 5 rubles, thanks to years of interest payments.

Andreyev, who lives on a monthly pension of 6,000 rubles,
plans to continue his campaign in Russian courts.

“In Soviet rubles, the bonds were equivalent to the cost
of a one-room apartment,” Andreyev said. “The 5 rubles we got
are equivalent to a roll of toilet paper.”